Stocks hit by fresh economic, banking gloom

PeterMcKay

NEW YORK (MarketWatch) -- Fears of higher rates in the U.S. and a credit downgrade of Greece sent stocks tumbling and roiled other markets as well Thursday.

The dollar soared, commodity prices sank, and Treasury prices climbed as investors sought safety. The gyrations were unusual at a time when many traders had been trying to ride out the last few days of a profitable year.

Instead, Thursday's swings have highlighted some of the big economic pitfalls that may hold their attention heading into 2010. The past 24 hours have seen fresh reminders of the challenges facing governments around the world as they try to strike a fine balance between avoiding inflation and propping up key parts of their respective economies to keep the recovery going.

The Dow Jones Industrial Average
DJIA, +0.33%
was recently down 89 points, or 0.9%, to 10,351.72. The Nasdaq Composite Index
COMP, +0.44%
fell 1%. The Standard & Poor's 500 Index
SPX, +0.22%
slipped 0.8%, led by a 1.8% slide in its basic-materials sector, which suffered from the pullback in commodity prices. All the S&P's other sectors posted declines as well, with the financial and consumer sectors falling more than 1% each.

"This is pure risk retrenchment that we're seeing," said strategist Jack Ablin of Harris Private Bank, which has recently grown more cautious about adding to its exposure to U.S. stocks.

Alluding to 14-month highs that major indexes had hit a few days before Thursday's slump, he added: "The market is probably fairly valued right now, with enough momentum to perhaps carry it into expensive territory at some point. But it can't stay there for long."

Traders said worries about the prospects for earlier interest-rate increases in the U.S. have spread, beginning with the currency markets, since Wednesday afternoon, when the Federal Reserve acknowledged improvement in the U.S. employment picture. Buying of dollars continued overnight as overseas traders reacted to the news, then spilled into New York trading. The U.S. dollar index
DXY, +0.41%
was recently up 0.8%.

Such rallies in the currency tend to make items traded globally in dollar terms, including commodities, more expensive. For the moment, a stronger dollar also is bad for major U.S. companies that have come to depend heavily on exports to fast-growing overseas economies for a greater share of their profits.

Gold contracts were down $32.70 to $1,103 per ounce. Oil contracts fell 43 cents to $72.23 a barrel in New York. The broad Dow Jones-UBS Commodity Index was off 1.2%.

Financials were also a weak point for the stock market, hurt in large part by a 7.3% decline in Citigroup Inc.
C, +1.85%
Investors demanded a price so low for a secondary share offering by the Wall Street giant that the U.S. government shelved plans to trim its 34% stake in Citigroup, as the Treasury Department would have lost money on the deal. Read more about Citi action

"As much as everybody likes to rail against Citigroup, they are a huge component of the financial business," said Thomas Nyheim, vice president and portfolio manager at Christiana Bank and Trust. "If they're having trouble raising equity and getting rid of some of their bad assets, other banks are going to have trouble too."

Traders also reacted to the market's technical position, with the S&P 500 hovering just above 1,100 for much of the week.

"Once we got declining towards that level, it's a magnet," said Todd Salamone, vice president of research at Schaeffer's Investment Research. "The market may be more vulnerable to sell-offs when negative news hits when it's sitting atop a trading range than when it's sitting near the bottom."

Sovereign credits were in focus Thursday after S&P cut Greece's credit rating to triple-B-plus from single-A-minus late Wednesday. The agency put Greece on watch for a possible downgrade on Dec. 7. The speed of the cut, and the fact that S&P left Greece on negative watch, alarmed the market. Read more about debt-disaster fears.

In U.S. economic news, the Labor Department reported initial claims for jobless benefits rose 7,000 to a seasonally adjusted 480,000 in the week ended Dec. 12. Economists had expected claims would fall by 9,000. Read more about jobless claims.

Separately, the index of leading economic indicators rose for the eighth consecutive month in November, while mid-Atlantic area manufacturers saw rising activity. Still, those reports failed to boost sentiment Thursday.

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